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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,Plaintiff,

v.

MICROSOFT CORPORATION,Defendant.

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| Civil Action No. 98-1232 (TPJ)
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STATE OF NEW YORK ex rel.
Attorney General ELIOT SPITZER, et al.,
Plaintiffs,

Antitrust Bureau
New York State Department of Law
120 Broadway Street, Suite 2601
New York, New York 10271

Plaintiffs' initial and revised Proposed Findings of Fact ("PJPF") set forth detailed,
overwhelming evidence of the elements of plaintiffs' antitrust claims. This evidence
comes, in part, from credible and knowledgeable representatives of many of the
country's most successful technology companies (IBM, Apple, Sun, Intel, Intuit, America
Online). It comes also from distinguished economic and technical experts recognized
as leaders in their fields.

At trial Microsoft relied on the testimony of its own employees (who repeatedly
contradicted their own contemporaneous documents), two representatives of software
companies (whose businesses were admittedly dependent on special relationships with
Microsoft (see, e.g., GX 1663 at 9; GX 2276 at 46-47, 56-57), and who were
offered essentially as character witnesses for the defendant), a Compaq representative,
and an economist (whose testimony contradicted settled economic theory, his own
writings, his own testimony in prior cases, and the record evidence in this case). The
one potentially credible independent technical expert listed by Microsoft as a witness
was dropped as a witness after he refused at his deposition to support various
Microsoft assertions. Even with Microsoft's apparent criteria for witness selection,
however, every critical element of plaintiffs' claims is supported by the admissions of
Microsoft's own witnesses and Microsoft's own contemporaneous documents.

Microsoft's initial Proposed Findings ("MPF") ignore most of the evidence against it,
mischaracterize much of the evidence that is not ignored, and argue for a series of
propositions that are, as a factual matter, at odds with the trial record and, as an
economic and legal matter, irrelevant even if true.

I. Monopolization of the PC Operating System
Market

Plaintiffs' monopolization claim has two elements:

proof that Microsoft possesses present monopoly power, and

proof that Microsoft engaged in anticompetitive conduct to maintain its
operating system monopoly.

A. Microsoft's Monopoly Power

Microsoft's monopoly power is proven by the uncontradicted evidence that Microsoft's
customers have no viable commercial alternative to Microsoft's operating system.

Microsoft's customers recognize, state, and act on the
premise that they have no viable commercial alternative to Microsoft's operating
system. (See PJPF Part II.A ¶¶ 15.1-2).

Microsoft itself tells its customers that they have no
viable commercial alternative to Microsoft's operating system. (See PJPF Part
II.A ¶ 15.1.4.1).

Microsoft internally recognizes and acts on the premise that its
customers have no viable commercial alternative to Microsoft's operating system.
(See PJPF Part II.A ¶ 15.1.-6).

Microsoft's monopoly power is also proven by its power over the price of its operating
systems.

A substantial increase in the price of
Windows will not cause (and has not caused) Microsoft's customers to switch to an
alternative operating system. (See PJPF Part II.C ¶ 34-38.1.2).

Microsoft's pricing of Windows is not materially constrained by the
prices or availability of non-Microsoft operating systems. (See PJPF Part II.A
¶¶ 15.1.3-4).

Microsoft's monopoly power is also proven by its high, stable market share coupled with
substantial barriers to entry.

The relevant market is
operating systems for Intel-compatible personal computers since operating systems for
other computers are not reasonable or viable substitutes for operating systems
designed to work with Intel-compatible personal computers. (See PJPF Part
II.B ¶¶ 19-20).

Microsoft's market share of
Intel-compatible PC operating systems is over 90%. Even if Apple's Macintosh
operating systems were included in the market, Microsoft's market share would still be
over 85%. (See PJPF Part II.B ¶¶ 21-22).

Microsoft's PC operating system market share is
projected to remain high for a significant period of time in the future. (See
PJPF Part II.B ¶¶ 21.3).

Microsoft's dominant market share is protected by high barriers to
entry, including the applications programming barrier to entry. (See PJPF Part
II.B ¶¶ 23-32).

Because the utility of a PC operating system depends on the number
and variety of software applications available for it, because applications software has
historically been primarily specific to a particular operating system, because network
effects reinforce the disproportionate number and variety of applications available for
the leading operating system, and because applications written for a particular
operating system are not readily portable to other operating systems, Microsoft, its
customers, and its actual and potential competitors all recognize that the applications
software barrier to entry effectively precludes the successful entry and expansion of any
viable commercial alternative to Microsoft's Windows operating systems. (See
PJPF Part II.B ¶¶ 26-27, 29-31).

Proof of these facts comes from Microsoft's own witnesses and documents. Microsoft's
economist conceded that there are no present commercially viable substitutes for
Microsoft's PC operating system (Schmalensee, 1/13/99pm, at 68:17 - 69:2).
Microsoft's contemporaneous business records acknowledge (indeed, rely on) that fact
as well (e.g., GX 365). This evidence from Microsoft confirms the uniform
testimony of Microsoft's customers and others that there is no commercially viable
substitute for Microsoft's PC operating system (See PJPF Part II.A
¶¶ 15.1.1-15.1.4.2).

Similarly, Microsoft's executive in charge of Windows pricing acknowledged that
Microsoft did not consider the prices of non-Microsoft operating systems in setting
Windows' prices (Kempin, 2/25/99pm, at 97:24 - 99:8). Moreover, after first denying it
in this litigation, at trial Microsoft ultimately conceded that it was able to raise the price
of Windows 95 even after Windows 98 came out (Schmalensee, 1/25/99am, at
51:25 - 52:12 (sealed session); Fisher, 1/11/99pm, at 42:18-43:7; see also
PJPF Part II.C.2 ¶ 36; Schmalensee, 1/20/99pm, at. 38:13-21, 37:17-24). This
evidence from Microsoft's own witnesses and documents again merely confirms the
evidence from Microsoft's customers and others. (See PJPF Parts II.A
¶¶ 15-15.1.6, II.C ¶¶ 33-38.3.3).

Microsoft's own economic expert also conceded that his conclusion that Microsoft did
not have monopoly power depended on the premise that "Microsoft does not have the
protection of substantial barriers to entry" (Schmalensee, 1/14/99am, at 8:22-9:9). And
the evidence is overwhelming that the applications barrier to entry is, at a minimum,
substantial (See PJPF Part II.B ¶¶ 17-31.3.3).

Microsoft's proposed findings do not (and could not) advance evidence that seriously
disputes the foregoing proof of its monopoly power. Instead, Microsoft makes a series
of assertions that are inconsistent with the evidence, law, economics, and common
sense.

In his direct testimony, Microsoft's economic expert placed primary reliance for his
conclusion that Microsoft did not have monopoly power on a pricing calculation that
purported to show that if Microsoft had monopoly power, it would price Windows at
roughly $2000, considerably more than the price of most PCs today.
(See PJPF Part II.D. ¶¶ 49, 49.3.2, 49.4). Plaintiffs know of
no case, nor has Microsoft identified any, in which a court has ever before considered
the methodology used by Microsoft's economist to test the existence of monopoly
power, and for good reason. (Even Dean Schmalensee in his long history as a
testifying expert appears not to have used it for any other case.) Leaving aside the
serious flaws in Dean Schmalensee's choice of values for his calculation (e.g.,
an unrealistically high average price for PCs; an arbitrary figure for elasticity of demand
for PCs; inadequate consideration of future and complementary revenues; use of
average values, even though a firm would consider marginal, not average, returns in
making pricing decisions), Dean Schmalensee's calculation was fundamentally flawed
in that it purported to calculate just the short-run profit-maximizing monopoly price, and
did not attempt to address the long-run profit-maximizing price. (See PJPF
Part II.D ¶¶ 49-49.4.2; Schmalensee, 6/24/99pm, at 73:10 - 78:20; Fisher,
6/4/99am, at 8:8 - 12:3). As Dean Schmalensee conceded, any monopolist would seek
to maximize long-term profits. (Schmalensee, 1/21/99am, at 12:6 - 14:21; 1/20/99pm,
at 34:24 - 38:11; 6/23/99am, at 7:3-6, 9:3-17).

Microsoft also now argues that it cannot have monopoly power because it actively
"evangelizes" (i.e., advertises, promotes, and supports its products), because it
innovates, and because there are some limits on what it can profitably charge for
Windows. Each of these propositions fails to recognize two fundamental principles.
First, monopoly power is never absolute; if it were there would be no such thing as a
monopolist, because every firm faces some degree of competition and some ultimate
limit on its prices. Second, even monopolists have incentives to innovate and to
promote and support their products because the more desirable a monopolist's
products are to its customers the more money the monopolist will make. The extent to
which customers have a viable alternative if they are dissatisfied varies with the extent
of a firm's monopoly power, but a monopolist will always have some incentive to
innovate and to advertise, market, and support its products.

Microsoft also advances the remarkable argument that, because Microsoft felt it
necessary to act to crush potential competitive threats, this means that Microsoft could
not be a monopolist since a monopolist would not face competitive threats in the first
place. To some extent this argument continues Microsoft's effort to confuse the
question of what actually competes with Microsoft (i.e., viable substitutes for Microsoft's
PC operating system) with the question of what Microsoft was seeking to thwart
(i.e., complementary middleware products like browsers
which,while not competitive
substitutes, threatened to reduce the applications software
barrier to entry and thereby facilitate operating system competition).

Even more fundamentally, Microsoft's argument again sets up the straw man of
whether Microsofthas been proven to have absolute monopoly
power that will last forever. That is not, never has been, and could not be the test of
monopoly power. Indeed, because monopolization requires both power and
anticompetitive conduct to maintain that power, there could, under Microsoft's theory,
never be monopolization -- the very act of engaging in anticompetitive conduct to
maintain the monopoly would itself demonstrate that there was not monopoly power.

Finally, Microsoft argues that because its power may be eroded some time in the future
it should not be held to have monopoly power today. Monopoly power is no less
monopoly power because it may not last forever. While there may be cases where
power is so fragile and transitory that it is not really power at all, that is not remotely the
fact in this case. Microsoft's power has endured for years and there is no end in sight.

Indeed, even Microsoft's economist concedes that the speculation that the future may
bring a competitive alternative to Microsoft's captive customers is no more than
speculation. Dean Schmalensee asserts that Linux and, to a lesser extent, the Be
operating system are the closest there is to a present alternative to Microsoft's PC
operating system for OEMs.(1) Even as to Linux,
Dean Schmalensee agrees that Linux is not "a viable competitive alternative to
Windows for OEM manufacturers like Hewlett-Packard and Compaq" (1/13/99pm, at
42:14-22); the most he can say is that "in a year, in two years, the answer may well be
different" (id. at 42:21-22). When pressed as to when "if ever" Linux or Be
"would be a significant competitive constraint" (id. at 53:3-6), Microsoft's
economist admits it is "impossible" to say (id. at 53:7-8) and that "I do not
believe that can be reliably forecast, and I have not tried to do so." (id. at
53:15-16).

Similarly, when Microsoft witness Gordon Eubanks tried to soften his assertions that
Microsoft was a "monopoly," the best he could do for his colleagues was to assert that
things might change in "five to ten years." (Eubanks, 6/16/99pm, at 87:4 - 93:9). Such
vague speculation about conditions years in the future does not, and cannot, vitiate the
fact that for the present (and for the foreseeable future, particularly if Microsoft is
unconstrained by the antitrust laws in dispatching competitive threats) Microsoft
possesses monopoly power.

In its Proposed Findings, Microsoft also points to several additional possible future
developments concerning everything from Palm Pilots to the AOL/Netscape merger to
the iToaster that it, presumably with a straight face, offers as evidence of its lack of
monopoly power. The problems with each of these putative Microsoft competitors
(see PJPF Parts II.D ¶¶ 46-48, VII.C ¶¶ 394-396) are:

They are not expected, even in the future, to evolve into PC operating
systems, nor do they threaten to reduce the applications barrier to entry and therefore
would not facilitate entry by other operating systems (see PJPF Parts II.D
¶ 46.1, VII.C ¶ 396);

Whatever the growth in "other devices," there is no evidence that
those devices will become substitutes for PCs for any but a very limited number of PC
users. Plaintiffs' evidence, Microsoft's internal documents, and even the testimony and
exhibits Microsoft offered at trial show that the PC is projected to be the dominant form
of personal computing for many years into the future. DX 2423, at 37 (PC shipment
values will continue to far exceed information appliances). As Bill Gates recently
stated, the PC will "remain the primary computing tool." GX 2059.
(Seealso PJPF Parts II.D ¶¶ 46-47, VII.C ¶ 396);
and

Even if such devices evolved into substitutes for the PC years into the
future, the impact would only be to make Microsoft's monopoly in the PC operating
system market less valuable by constraining sales of PCs; it would not reduce
Microsoft's monopoly power in the PC operating system market.
(Seealso PJPF Parts II.D ¶¶ 46.2, VII.C ¶ 396).

B. Anticompetitive Conduct

1. Background

The Internet precipitated a variety of innovative technologies that threatened to reduce
the applications barrier to entry and thereby weaken the Windows monopoly. The
browser properly received the greatest attention at trial. Of the emerging
Internet-oriented "middleware" technologies, the browser most rapidly became a strong
complement to Windows, and thus posed the most potent threat. Moreover, the
browser threat had advanced the farthest, before Microsoft's attention finally turned to
crushing it, and thus left the longest trail of evidence before being thwarted.

But Microsoft's efforts have not been limited to the browser. Microsoft used a variety of
anticompetitive tactics to blunt threats from other middleware technologies under
development by, among others, Apple and Intel, and from cross-platform Java. The
record illustrates how Microsoft's tactics to defeat Netscape were emblematic of a larger
pattern and practice of anticompetitive conduct -- conduct designed to consistently and
systematically use the full weight and influence of its monopoly to wipe out any and all
incipient middleware threats.

The record shows that in each instance, Microsoft used sufficient measures to thwart
potential threats to its operating system monopoly. Unwilling to compete on the merits,
Microsoft routinely trampled on consumer interests in the process.

2. The Potential Threat To Erode The Applications
Barrier To Entry

The evidence at trial (essentially undisputed except for bizarre assertions by Mr. Gates
in his deposition that he was not aware of what Netscape was doing in mid-1995, and
by Mr. Rosen at trial that he did not believe in mid-1995 that Netscape was a
competitor) was that Microsoft recognized in the Spring of 1995 (see PJPF
Parts III.B ¶ 56; V.B.2 ¶¶ 119-21) that the browser marketed by
Netscape seriously threatened to erode the applications programming barrier to entry:

Products that facilitate the development of programs that
can be used with multiple operating systems (sometimes referred to as "cross-platform"
programs) tend to erode the applications barrier to entry and thereby threaten
Microsoft's monopoly power. (See PJPF Parts III.A ¶ 52, III.B ¶ 53
- 55).

Microsoft, its customers, its actual and potential competitors, and
software developers all recognize that the development of cross-platform application
programs tends to erode the applications programming barrier to entry, and thereby
threatens Microsoft's operating system monopoly. (See PJPF Parts III.A
& B ¶¶ 52-56).

The broad distribution and use of the Netscape browser threatened to
weaken Microsoft's monopoly power by encouraging applications developers to write
cross-platform programs to run with the browser, eventually eroding the application
barrier to entry and facilitating operating system competition. (See PJPF Part
III.B ¶¶ 53.3, 54).

As Microsoft also recognized, the Netscape browser was the primary
distribution mechanism for Java, which itself threatened to erode the applications
software barrier to entry by facilitating the development of cross-platform applications
programs. The broad distribution and use of the Netscape browser, therefore, became
a double threat to Microsoft. (See PJPF Parts III.B & C ¶¶ 55,
57-61).

3. The Anticompetitive Campaign

Microsoft feared that, because of the quality and popularity of Netscape's browser and
the head-start it had, Microsoft could not successfully compete with Netscape if
customers had an unrestricted choice of browsers. Indeed, Microsoft also feared that
even giving its browser away for free, and even paying people to use it, would not be
enough to prevent Netscape's browser from remaining the leading browser. However,
because of the importance that Microsoft attached to winning the browser war in order
to maintain its dominant operating systems position, Microsoft set out to dominate the
browser market regardless of the cost involved.

Because, as Cameron Myhrvold conceded, Microsoft concluded that users would
choose Netscape's browser over Microsoft's browser if given a choice (Myhrvold,
2/10/99am, at 62:7-25), Microsoft undertook a broad pattern of conduct and
agreements to prevent and frustrate users from making a choice between browsers on
the merits, indeed from making any choice at all.

Microsoft conditioned OEMs' licensing of Windows 95 and Windows
98 on OEMs' licensing, distributing, and promoting Microsoft's browser. Microsoft has
refused to offer its monopoly operating system separate from its browser even though
there is sufficient demand for the two products separately to make it efficient to do so.
(See PJPF Part V.B ¶¶ 93, 96-150).

Microsoft welded its browser to Windows 98 to prevent OEMs or end
users from removing the browser (or even from turning it off), without any efficiency
justification that could not have been achieved if Windows 98 and the browser were
also offered separately (or if OEMs and end users were given the ready ability to
remove the browsers). (See PJPF Parts V.B.2. & 3 ¶¶
145-165).

Microsoft entered into arrangements with ISPs and OEMs with the
purpose and effect of raising its rivals' costs, restricting customer choices, and
restricting its rivals' access to the most efficient and cost-effective distribution channels.
(See PJPF Parts V.C & D ¶¶ 175-257).

Microsoft entered into arrangements with ICPs, ISVs, and others
(including Apple) to limit the distribution, promotion, and support of Netscape's browser
and to require the distribution of Microsoft's browser. (See PJPF Parts V.E
& F ¶¶ 258-294).

Microsoft supplied its browser below cost as a "no revenue product,"
and announced that it would do so "forever." (See PJPF Part V.G
¶¶ 295-317).

Microsoft required OEMs to agree to screen restrictions that imposed
significant costs on OEMs and limited the OEMs' prior practices of promoting other
browsers more prominently than Internet Explorer as a condition of licensing Microsoft's
monopoly operating system. (See PJPF Part V.C ¶¶ 175-185).

Microsoft used its monopoly power in operating systems to penalize
OEMs and others who promoted competitive browsers and other products that could
facilitate competition with Windows. (See PJPF Part V.C ¶¶
196-211).

At the same time, Microsoft engaged in a related course of conduct to prevent other
firms from establishing any "middleware," including Java, that could threaten, no matter
how remotely, to erode the applications barrier to entry. For example:

Microsoft used its operating system monopoly to require the
distribution of its Windows-specific version of Java and to restrict the distribution of
cross-platform Java by requiring the distribution of Internet Explorer (which includes the
Microsoft-specific version of Java) and restricting the distribution of Netscape's browser
(which Microsoft recognized as the "principal distribution vehicle" for cross-platform
Java). (See PJPF Part VI.A ¶¶ 328-330).

Microsoft conditioned ISV access to Microsoft's monopoly operating
system (which ISVs required in order to be competitive) on ISVs agreeing to use
Microsoft's version of Java and not the cross-platform version. (See PJPF Part
VI.A ¶¶ 330, 339).

As shown in plaintiffs' Proposed Findings, the trial record clearly establishes that
Microsoft engaged in the foregoing conduct, and that it did so for the explicit purpose
and with the effect of eliminating the cross-platform threat to its operating system
dominance posed by Netscape's browser and by Java.

Microsoft's primary response to this proof of anticompetitive conduct appears to be that
other companies do the same (or similar) things. Even if that were true, Microsoft's
response is irrelevant as a matter of law and economics because companies with
monopoly power are, for good reason, subject to constraints on how they use that
power that do not apply to competitive firms. (Indeed, since much of Microsoft's
anticompetitive conduct involves the use of its monopoly power to coerce and induce
companies to restrict their use, distribution, and promotion of products that could
facilitate competition, such conduct can only be engaged in by a company with
monopoly power.) In any event, if Microsoft's conduct is anticompetitive it is not less so
merely because another company may also have engaged in it.

Most important for present purposes, Microsoft's response also is wrong as a matter of
fact. Microsoft's conduct differs significantly from other firms, both in its means,
including the raw use of its monopoly power, and its ends, the maintenance of its
operating system monopoly. For example, Microsoft asserts that it merely tied its
browser to its operating system in response to what other operating system suppliers
were doing. That is factually wrong on two counts --

Microsoft's contemporaneous documents make clear that it tied its
browser to Windows to eliminate the Netscape threat and win the browser war
(see PJPF Part V.B ¶¶ 119-125, 146), and

no other operating system supplier has done what Microsoft did:
refused to make its operating system available without a browser or prevented
customers from later removing that supplier's browser (see PJPF Part V.B
¶¶ 114-116).

With respect to Windows 95, Microsoft developed and sold at retail both a stand-alone
browser and a version of Windows 95 without any browser. Mr. Allchin repeatedly
testified that when combined, the stand-alone browser and the version of Windows 95
that did not include a browser gave consumers the benefits of an integrated browser.
(See, e.g., Allchin, 2/1/99pm, at 37:15 - 51:22). And the evidence shows that
Microsoft easily could deliver a version of either Windows 95 or Windows 98 without
web browsing. Nevertheless, Microsoft has refused to make a version of Windows 95
that does not include a browser available to OEMs, but instead has required OEMs to
license and distribute Microsoft's browser combined with the operating system.
No other operating system supplier engaged in such conduct. Indeed, no other
operating system supplier had the incentive or practical ability to engage in such
conduct. Suppliers without monopoly power must seek to give customers what they
want. The record demonstrates that OEMs wanted this option. (See PJPF Part
V.B ¶¶ 111-112). Microsoft, however, had both the ability and strong
incentives to do what it did.

First, because of its monopoly power, OEMs had no choice but to
take whatever version Microsoft offered. (See PJPF Part II.A ¶ 15).

Second, whatever loss in attractiveness of its product that Microsoft
suffered from forcing the tie on consumers was more than offset by the effect of
maintaining Microsoft's operating system dominance that resulted from eliminating the
Netscape threat. (See, e.g., PJPF Parts V.G ¶ 309, VII.A ¶¶
358-359, 369-371).

With respect to Windows 98 Microsoft not only required OEMs to accept and not
remove the browser; it also effectively prevented consumers from removing (or even
completely turning off) the browser (something Microsoft had made easy in Windows
95). Again, no other operating system supplier engaged in such conduct. Such
conduct only makes sense for a company with monopoly power that is seeking to
preserve that power by denying customers a free choice.

With respect to both Windows 95 and Windows 98, Microsoft has been able to point to
noplausible benefits to consumers of tying the browser to the operating
system. (See, e.g., PJPF Part V.B ¶¶ 148-170). Instead, the
evidence demonstrates that beneficial "integration," as Microsoft uses the term, means
only that two products are designed to work well together, whether or not they are even
produced by the same firm. (See, e.g., PJPF Part V.B.3 ¶¶
159.6-7, 160). Whatever benefits of integration exist can, as Mr. Allchin conceded, be
accomplished by an OEM or customer combining a version of Windows that does not
include a browser with a stand-alone Microsoft browser. Indeed, as Mr. Allchin testified,
the "distribution vehicle" is not important: "It doesn't matter how it was purchased. It's
just code." (Allchin, 2/1/99pm, at 38:23 - 39:24). The only difference is that, when
Microsoft combines them, conditions a license of its monopoly operating system on
licensing and distributing its browser, and requires OEMs to agree not to remove the
browser, Microsoft's customers are deprived of a free-market choice of which browser
(if any) to acquire and rivals' costs are raised. As Mr. Myhrvold testified, it was
precisely because Microsoft feared that customers who were free to choose would
choose Netscape that Microsoft set out to prevent customers from having a choice.
(Myhrvold, 2/10/99am, at 62:7-25).

Microsoft also tries to defend its below-cost distribution of its browser by pointing to
other companies' distribution of browsers and other products without charge. Again
Microsoft's argument is factually wrong and legally irrelevant. It is irrelevant what
companies without monopoly power do.(2) Firms
without monopoly power (or the prospect of obtaining it) cannot give away a product
unless they can capture revenues through normal competitive means (for example,
through sales of advanced versions of the product), and the evidence indicates that is
the case with the firms Microsoft cites. (See PJPF Part V.G ¶ 313.4). In
Microsoft's case, it recoups its browser losses from maintenance of its operating system
monopoly -- the very definition of predatory pricing.

Microsoft's lawyers' argument that Microsoft could recoup its losses through ancillary
revenues is contrary to the trial record, including the unambiguous evidence from
Microsoft's contemporaneous documents that make clear that Microsoft acted to
preclude the browser threat, that the browser was to be a "no revenue product," that
possible ancillary revenues played no role in Microsoft's decision-making, and that
Microsoft sacrifices, rather than seeks, browser-related ancillary revenues in order to
increase its browser share at Netscape's expense. (See PJPF Part V.G
¶¶ 313-313.3). (In fact, even when answering interrogatories in May 1998,
it had not yet occurred to Microsoft to try to justify its below cost browser distribution on
the basis of browser ancillary revenues. (See GX 1547)). Similarly,
Microsoft's after-the-fact contention that the zero price for Internet Explorer was
designed to increase the value of Windows is inconsistent with its contemporaneous
explanation of the reasons for its browser pricing and with the actions Microsoft took to
restrict the distribution of other browsers -- actions that reduce, not increase, the value
of Windows to consumers and make sense only as a device to eliminate the browser
threat.

However Microsoft may try to complicate this issue for litigation purposes, the simple
facts are:

From the time Microsoft recognized the threat posed by Netscape,
Microsoft distributed its browser below any relevant measure of cost (see
PJPF Part V.G ¶¶ 305, 311, 313-314);

Microsoft has recouped, will recoup, and from the beginning intended
to recoup its browser losses from the maintenance of its operating system monopoly
(see PJPF Part V.G ¶ 301).

With regard to Microsoft's imposition of the screen restrictions on the OEMs, the
evidence shows that Microsoft did not impose such restrictions until it became
concerned that OEMs were using their ability to differentiate their products to promote
competing products such as Netscape's browser. (See PJPF Part V.C ¶
177). Microsoft's defense is to assert, based on conclusory testimony of its own
employees, that the restrictions were unimportant -- a position flatly inconsistent with
the contemporaneous documents of Bill Gates and others, with the testimony of OEMs,
and with Microsoft's vigorous efforts to police those restrictions prior to this litigation.
(See PJPF Part V.C ¶¶ 177-178, 185).

Microsoft also says that after this litigation began it has granted certain OEMs certain
oral exceptions to the written restrictions. The fact that OEMs continued to seek such
exceptions is further evidence of the significance of the restrictions. The fact that
Microsoft granted those exceptions underscores that the justifications Microsoft now
advances to defend them are pretextual. Apparently abandoning its position that these
restrictions were necessary to maintain a "consistent user experience," Microsoft
permitted OEMs to make a myriad of changes -- except when those changes would
jeopardize Microsoft's exclusionary strategy. Moreover, whatever relaxation of the
restrictions Microsoft now permits does not undo the substantial competitive harm
caused while the restrictions were in effect. Nor does it guarantee that Microsoft will
continue to grant its sufferance for such exceptions after this litigation is over. Indeed,
the evidence shows that much of Microsoft's power to coerce and induce customers
and competitors to do its anticompetitive bidding comes from its power to grant or
withhold the ad hoc exceptions and cooperation that, because of Microsoft's monopoly,
those customers and competitors need. (See PJPF Part V.C ¶¶
186-187).

Microsoft's suggestion that the restrictions are somehow justified by its copyright (MPF
¶¶ 1029-31) is a red herring. Microsoft's contemporaneous documents
make clear that Microsoft recognized that its copyright alone did not prevent the OEM
product differentiations that Microsoft was determined to stop, and that new contractual
provisions were required. See PJPF Part V.C ¶ 177.2, 194.2A. In any
event, the existence of a patent or copyright does not grant antitrust immunity. Indeed,
the use of a patent or copyright to secure additional market power is an antitrust
violation, not an antitrust defense.(3)

Microsoft imposed screen and other contractual restrictions on OEMs
for the specificpurpose of preventing OEMs from continuing to effectively
distribute and promote Netscape's browser and other non-Microsoft products
(see PJPF Part V.C ¶ 178);

Microsoft, OEMs, Netscape, and others all recognized that the
restrictions significantly restrict the effective distribution and promotion of competing
products, including Netscape's browser, by OEMs (see PJPF Part V.C ¶
178-182, 185);

Microsoft conditioned OEMs' access to Microsoft's monopoly
operating system on the OEMs' agreeing to the contractual restrictions (see
PJPF Part V.C ¶ 177.3); and

Microsoft's justifications for those restrictions are pretextual (see
PJPF Part V.C ¶¶ 188-193).

Microsoft attempts to defend its arrangements with OEMs, ISPs, ICPs, ISVs, and others
to require distribution and promotion of Internet Explorer and to restrict distribution and
promotion of Netscape's browser by asserting that other companies enter into joint
marketing programs that it alleges are similar to Microsoft's. But Microsoft's conduct
was, once again, quite different. The other firms to which Microsoft compares itself do
not effectively tie up 75% to 100% of the two most important (and most efficient)
channels of distribution for the purpose of blunting an emerging threat to their monopoly
position.(4)

Microsoft's suggestion that its actions are lawful as long as some other channel
(however costly, inefficient or ineffective) remains available has no support in law,
economics, or common sense. As Microsoft's economist concedes, what is important is
the "real world." (See,e.g., Schmalensee, 1/13/99pm, at 52:18-21,
1/25/99am, at 21:4-9 (sealed), 6/22/99pm, at 34:10-11, 37:23 - 38:1, 59:6-14). The
evidence is clear that in the real world there are not viable substitutes for the ISP and
OEM channels; indeed, today the OEM channel itself has no viable substitutes.
(See, e.g., GX 1553 (2/26/96 Myhrvold e-mail explaining Gates' view that "as
soon as we put IE into Win95, it's [ISP distribution] no longer an
issue")).Moreover, if the "real world" were as Microsoft asserts,
there would have been no reason for it to expend the substantial money and effort it did
to exclude Netscape from particular channels. The very fact Microsoft took the actions
it did belies its current litigation argument that all distribution channels are effectively
equivalent. (See PJPF Part VII.A ¶¶ 362-363, 365-366).

Microsoft's contracts have resulted in Microsoft's browser being distributed with virtually
100% of PCs at the present time, and Netscape's browser also being included with less
than 25% of new PCs. (In the period prior to the trial date of this case, Netscape was
included with far fewer new PCs. During the trial, Compaq (which provided a witness
for Microsoft and boasts of its special "front-line" partnership with Microsoft) suddenly
began shipping Netscape's browser in addition to Microsoft's browser. (See,
e.g., PJPF Part VII.A ¶ 380.3.1)).

This is not a case where a firm competed on the merits for distribution, promotion, and
support of its product. Rather, this is a case where a monopolist uses its monopoly
position over one product (the operating system) to restrict the distribution and
promotion (and to raise competitors' costs of distribution and promotion) of a new
product (the browser) that threatens to facilitate competition with the monopoly product.

The simple, dispositive facts with respect to the ISP and OEM channels are:

Those two channels are, and were recognized by Microsoft to be, the
two most important, effective, and efficient channels for browser distribution.
(See PJPF Part V.A.2 ¶¶ 362-363).

No other channel of distribution is an effective substitute for those
channels. Indeed, as Microsoft recognizes, there is today no effective substitute for the
OEM channel. (See PJPF Part V.A ¶¶362-363).

Microsoft foreclosed Netscape from more than 75% to 80% of the ISP
channel, including during the years that channel was most important. (See
PJPF Part V.D. ¶¶ 222, 243).

Even the dubious figures relied on by Microsoft at trial show that
Microsoft foreclosed Netscape from some 78% of the OEM channel. (See
PJPF Part VII.A ¶ 380.3.1.3).(5)

Microsoft accomplished its foreclosure in part by telling ISPs and
OEMs that they would not be able to have access to Microsoft's monopoly operating
system unless they agreed to the previous Microsoft demands. (See PJPF
Part V.C & D ¶¶ 203.1, 205.1-2, 224, 227-231).

Microsoft was willing to give up things of "potentially great value"
(Silverberg Dep., 1/13/99, at 689:16-25; see also id. at 692:12 -693:25) to
secure these channels for itself, and to foreclose competitors, precisely because it
recognized that these channels were the most effective and efficient and that other
channels were not viable substitutes. (See, e.g., PJPF Parts V.D
¶¶ 230-232 & VII.A 366).

In the face of the foregoing facts, Microsoft's proposed findings attempt to argue that all
of Microsoft's conduct (on which Microsoft spent so much money and to which it
attached such importance) really had no effect. After earlier declaring (internally and
publicly) that the browser war was over and it had won, Microsoft now asserts as a final
defense that its conduct has not really diminished the ability of the Netscape browser to
facilitate platform competition with Windows. Having first claimed that it did not shoot
the victim, and then that everyone does it, and then that the victim would have died
anyway, Microsoft now argues that the victim is unharmed.

The facts, of course, are otherwise. Microsoft's contractual restrictions substantially
foreclosed the two most important channels for obtaining browser usage. And Microsoft
engaged in a broader course of anticompetitive conduct, including its agreements with
third parties such as Apple and its predatory pricing, that also contributed to the
significant anticompetitive increase in Internet Explorer's share at browser rivals'
expense.

Regardless of whose figures are used, it is clear that Netscape's share has declined
substantially, Microsoft's share has increased sharply, and (in the absence of a judicial
remedy) those trends will continue. (See PJPF Part VII.A ¶¶
369-370, 381). The figures that Microsoft relies on are seriously flawed survey data
that produce results inconsistent with plaintiffs' studies and inconsistent with the figures
used and relied on by Microsoft itself in the ordinary course of running its business.
The figures are even inconsistent with figures used by Microsoft at trial to show that
Netscape dominated the browser market in the early years of Microsoft's conduct --
when Microsoft wants to argue that Netscape was initially dominant so that Microsoft
was entitled to use whatever techniques it wanted. Microsoft uses one set of figures
that shows Netscape's early share very high; when Microsoft argues that Netscape's
share has not declined all that much, it uses a different set of figures that shows
Netscape's early share much lower. (See PJPF Part VII.A ¶¶
377-377.1.2A).

But even Microsoft's flawed survey data show significant declines in Netscape's share
(and increases in Microsoft's share). Those share changes are particularly dramatic
when a "flow" measureof share -- net new browser installations (rather
than the installed base figures that include Netscape's browser installations from prior
years) -- are considered. For example, as Microsoft executive Brad Chase testified at
trial, Microsoft's share of new browser installations during the first nine months of 1998
was over 75%. (Chase, 2/11/99pm, at 5:1 - 7:2; GX 1845; GX 1846; PJPF Part VII.A
¶ 369.2; MPF ¶ 248).

Microsoft argues in the alternative that its share gains (and
Netscape's share losses) are simply the result of Microsoft offering a better product.
(MPF ¶ 270). Microsoft's argument is, again, inconsistent with the evidence.(6) (See PJPF Part VII.A ¶ 381.1).

Microsoft's share began to increase dramatically before even
Microsoft claims at trial it had a superior product (See PJPF Part VII.A ¶
381.1); and

Microsoft's internal assessments (as has so often been the case in
this trial) contradict Microsoft's litigation claims and in fact corroborate the evidence
from plaintiffs' witnesses.(7)

The evidence, including Microsoft's own documents, shows that Microsoft's conduct has
vitiated the threat non-Microsoft browsers posed to its monopoly, weakened the Java
threat, and has deterred, and will continue to deter, other such threats from arising.
Microsoft's contention that AOL can single-handedly resurrect the browser threat
ignores the impact of Microsoft's predatory campaign: having made clear it will use its
monopoly power and other weapons to blunt threats to its operating system, Microsoft
has successfully deterred AOL and others from taking action that would threaten
Microsoft's core operating systems monopoly. Microsoft's contention also ignores the
fact that Microsoft continues to make AOL an offer AOL cannot rationally refuse to
distribute and support Microsoft's browser even at the expense of the browser it owns.

4. Consumer Harm

Because monopolization invariably distorts market forces, the antitrust laws are based
on the principle that the willful maintenance of monopoly harms consumers. Even
without the compelling evidence of direct and substantial consumer harm present in this
case, Microsoft could not defend conduct that otherwise violates the antitrust laws on
the grounds that it did not hurt consumers enough in the short run. As the Supreme
Court has repeatedly held, monopolization is illegal because it is recognized to always
harm consumers in the long run. In any event, in the present case, there is compelling
evidence that Microsoft's conduct has directly, immediately, and substantially harmed
consumers, and, left unabated, will continue to harm consumers. Microsoft's practices
have immediately harmed consumer welfare by depriving consumers of choices, by
making it more difficult for consumers to obtain and use certain non-Microsoft products,
by increasing consumers' costs, and by depriving consumers of the benefits of
innovation outside Microsoft's control. For instance:

Microsoft's contractual restrictions in the OEM channel made it more
costly for OEMs to promote and distribute non-Microsoft browsers (and therefore less
likely that consumers would have a convenient choice of alternative software)
(see PJFP Parts VII.A & E ¶¶ 364-369, 371, 405-406);

Microsoft's contractual restrictions on browser choice through the ISP,
OLS, ICP and the Apple Macintosh channels, combined with its other practices,
substantially deprived consumers of the ability to make a meaningful choice between
products, and to obtain and use non-Microsoft browsers (see PJFP Parts VII.A
& E ¶¶ 365, 369-371, 405-406.1-2);

Microsoft's welding of the browser to the operating system also
increased the costs to users of obtaining and using non-Microsoft browsers, and
deprived consumers of the choice of having no browser at all (see PJFP Parts
V.B ¶¶ 166-174, VII.A ¶¶ 405-406);

Microsoft's conduct with respect to alternate platforms and standards
such as Java and HTML deprived consumers of the benefits of innovation unimpeded
by Microsoft's use of its operating system monopoly (see PJFP Parts VI.A
& B ¶¶ 333, 353, VII.E 405-406, 408-410).

In addition, the consumer harm caused by Microsoft's individual acts is not harm that
occurs in isolation; the cumulative impact of these practices, operating together and
reinforcing one another, has been far-reaching consumer harm. Microsoft's widespread
pattern of conduct to maintain its operating system monopoly has deprived consumers
of the long-run benefits of competition in the operating systems market and the greater
choices, price reductions, and non-Microsoft innovation that would follow from such
competition. For instance, Microsoft's willingness to take whatever action necessary to
undermine Internet-related middleware threats (even remote ones) will continue to harm
consumers:

Microsoft will continue to have substantial control over the standards
for software development (and therefore maintain its operating system monopoly)
(see PJFP Part VII.C ¶¶ 398-401);

Microsoft will continue to control the direction of innovation in software
and hardware, including on the Internet (see PJFP Parts VII.C ¶ 402);
and

Microsoft will continue to exert substantial influence over the
innovations attempted by rivals and competitors, by virtue of expressing its approval or
disapproval, and its well-known ability, willingness, and incentive to predate against
future threats (see PJFP Parts VII.C ¶¶ 403-404).

II. Attempted Monopolization of the Browser Market.

The two elements of plaintiffs' attempted monopolization claim are:

anticompetitive conduct, from which a specific intent to monopolize
may be inferred; and

a dangerous probability of success.

Microsoft's anticompetitive conduct concerning the browser, discussed in connection
with Microsoft's monopolization of the operating system market, also supports plaintiffs'
attempted monopolization claim. Microsoft's dangerous probability of success is shown
by the sharp and continuing increase in Microsoft's share -- already about 50% even by
Microsoft's survey data on an installed base measure, and already over 70% on a share
of new installation basis. (See PJPF Part VII.B ¶¶ 390, 386.1).

Moreover, even in the absence of all that evidence, the June 21, 1995 market division
meeting would be sufficient by itself to prove attempted monopolization. The
participants in the meeting were recognized at the time as the two significant actual or
potential browser suppliers. No other browser supplier was projected to obtain (or did
thereafter obtain) more than a marginal share. The evidence from both the Netscape
and Microsoft participants, and from the contemporaneous documents prepared by
Netscape and Microsoft, is that Microsoft planned to propose and did propose an
arrangement in which Netscape would receive valuable concessions if it agreed to
restrict its browser competition with Microsoft, and that if Netscape refused it would be
penalized. (See PJPF Part IV.A ¶¶ 67-70). This is also what
participants in the meeting reported at the time to AOL had occurred. (See
PJPF Part IV.A ¶ 67.9). This evidence is also confirmed by the testimony of
Microsoft executive Chris Jones, who had been given the responsibility for presenting
Microsoft's position at the meeting. (See PJPF Part IV.A ¶ 67.2).

In the face of this evidence the deposition testimony of Mr. Gates that he was not aware
at the time even what Netscape was doing and the trial testimony of Mr. Rosen that he
did not at the time consider Netscape a competitor or competitive threat is simply not
credible.

Perhaps realizing as much, Microsoft in its Proposed Findings argues that it could not
monopolize a browser market because (contrary to Microsoft's internal documents and
analyses, contrary to common industry understanding, contrary to the head-to-head
browser competition in which Microsoft and Netscape engaged, and contrary to the
consistent evidence that customers viewed browsers as a distinct market) there really is
not a browser market at all. (MPF ¶ 242).

Microsoft asserts that this is so because Microsoft has combined the browser with its
operating system and priced the browser at zero. If Microsoft's arguments were correct,
companies could attempt to monopolize (indeed monopolize) with impunity simply by
pricing at zero and tying the product to be monopolized to another product that was
already monopolized. Microsoft's argument also ignores the facts that:

Netscape continues to market browsers separate from any operating
system (see PJPF Part V.B.1 ¶ 113.1);

Microsoft itself continues to market browsers separate from the
operating system (including through ISPs, ICPs, Apple, and at retail) (see
PJPF Part V.B ¶ 113.2); and

Before it was forced to reduce its price to zero to match Microsoft,
Netscape was earning more than $100 million a year from licensing its browser
(see PJPF Part V.G ¶ 298.3.1; Schmalensee Dir. Figure 1).

Microsoft also suggests that plaintiffs' attempt to monopolize claim should fail because
Netscape refused Microsoft's proposal. But Netscape's refusal did not make Microsoft's
proposal any less of an attempt; not every attempt succeeds or there would be no
attempted monopolization. (Moreover, as already noted, the attempt claim is not
dependent on the market allocation proposal; even if the market allocation proposal had
never occurred, Microsoft's other anticompetitive conduct following the June 1995
meeting would still establish an attempt to monopolize).

Of a similar vein is Microsoft's argument that it is not guilty of attempted monopolization
because Netscape is still marketing browsers. But it is not necessary that a competitor
be eliminated in order to establish a monopolization claim. No attempt case has ever
been held not to meet the dangerous probability threshold on facts even approaching
the strength of those present here, including the evidence of Microsoft's market share
and market share trends.

III. Unreasonable Restraints of Trade

Because Microsoft's exclusionary conduct includes anticompetitive agreements, that
conduct violates Section 1 of the Sherman Act as well as Section 2.

Microsoft's conduct in tying its browser to its operating system; in coercing and inducing
OEMs to agree not to remove the browser or turn it off or remove its icon, and to agree
to limit their promotion of Netscape's browser on the first screen and otherwise; in
coercing and inducing ISPs, ISVs, ICPs, and others, including Apple, to agree to limit
their promotion and distribution of Netscape's browser; and in coercing and inducing
ISVs and others to agree to limit their promotion and distribution of Java, in each case:

substantially restrains trade and prevents competition on the merits,
and

is not reasonably necessary to achieve any legitimate purpose.

FOOTNOTES

1. Dean Schmalensee testified that he saw two examples of
"emerging competition" for the "desktop operating system" -- Linux and the Be
operating system (1/13/99pm, at 52:1-7). He quickly conceded, however, that "Be is
not a system to which a large OEM is likely to switch" (id. at 52:22-24) and that
it was possible that over 90% of the users of Be used it with, not instead of Windows
(id. at 52:8-21). Seealsoid. at 50:5-24.

2. The conduct of companies without monopoly power might be
relevant if it substantiated a claim that Microsoft undertook its below-cost distribution in
order to achieve some legitimate purpose and not as a means of excluding competition.
In the present case, the evidence is clear that Microsoft undertook its below-cost
distribution of the browser to maintain its operating system monopoly. (See
PJPF Part V.G ¶ 298).

3. Moreover, the modifications that the restrictions prohibit
OEMs from taking do not involve the sort of creative expression that could plausibly
implicate its copyright, and Microsoft's waiver of some restrictions shows they were not
intended to ensure that Microsoft reaped the value of its copyrighted work.
(See PJPF Part V.C ¶ 178.3).

4. Moreover, these firms could not offer the valuable
inducements Microsoft did in order to bribe firms to agree to exclude their rivals
because these firms could not recoup those expenditures through preserving monopoly
power. Nor could these firms use such power, as Microsoft did, to extract or coerce
such agreements.

5. Microsoft introduced some evidence that Netscape was
involved in 22% of PC shipments. Among the problems with that number is that it
includes all instances in which Netscape's browser was included in the box or on a disk
-- instances in which the consumer is unlikely to actually use the browser. By contrast,
Microsoft's browser is preinstalled on the desktop 100% of the time.

6. Even if that were true, it would not be a defense because
Microsoft's conduct was intended to (and did) reduce the ability and incentive of
Netscape to continue to invest in product improvements.

7. Microsoft's internal documents recognize that Microsoft's
browser is seen as a "commodity product" with no significant advantages. (See,
e.g., GX 173). Microsoft's primary "evidence" to the contrary consists of little more
than ambiguous press articles, none of which link any increase in the quality of Internet
Explorer to its gains in usage share. (See PJPF Part VII.A ¶ 381.3.3).